Definition of Red Flag

A "red flag" is a warning. A "red flag" is when you notice something that is not quite right that may betray further problems underneath the surface.

Let's say that you are analyzing the balance sheet and annual statements of a stock that you were thinking of adding to your long-term portfolio. You quickly notice that the CFO of the company has announced his departure just four months after he was hired for the job. This is a major "red flag".

Let's say that you notice that the CEO of the company is selling his shares like crazy. This is another "red flag" - if the CEO is selling his shares with reckless abandon, then why should you want to own the stock?

Let's say that the CEO of the company that you are examining seems to spend most of his time crusading against short-sellers. Once again, another "red flag" - why is the CEO focusing on attacking critics instead of building the business? The best defense against short-sellers is to outperform.

Again - a "red flag" is an indication that there are some bad things taking place underneath the surface of a company.